Answer:
See below.
Explanation:
Lets first calculate inflation using the formula for Consumer Price Index
Inflation for a good = (Year 2 price - Year 1 price / Year 1 price) * 100
Using the above formula we can calculate inflation when Beans = $2 and Rice = $6.
Inflation for Beans = (2-1/1) * 100 = 100%
Inflation for Rice = (6-3/3) * 100 = 100%
Since each of them use rice and beans in equal proportions we assign them weights of 0.5 each,
Inflation Total = 0.5 * 100 + 0.5 * 100 = 100%
We assume Bob and Rita form a transnational relation and as such neither is worse off because the exchange rate between them remains the same,
Exchange rate before inflation = 3/1 = 3, Bob can buy 1 Rice by selling Rita 3 Beans.
Exchange rate after inflation = 6/2 = 3, so Bob can still buy 1 Rice by selling Rita 3 Beans.
B) For Prices 2 and 4 we use the above formulas,
Total Inflation = (2-1/1)*100*0.50 + (4-3/3)*100*0.50 = 66.66%
Bob is better off and Rita Worse off as the exchange rate for Bob has improved He can acquire 1 Rice for 4/2 = 2 Beans instead of 3 he needed before. Rita needs to sell him more to maintain her consumption but since they always consume same amount, she is worse off.
C) For Prices 2 and 1.5.
Total Inflation = (2-1/1)*100*0.50 + (1.5-3/3)*100*0.50 = (50-25) = 25%
Bob is now worse off and Rita better off as the Exchange rate change has favored Rita. Rita now only needs to sell 1 rice to obtain 2/1.5 = 1.3 units of Beans. Bob will have to sell more to maintain his initial consumption level.
D)
Bob and Rita are more concerned with their rate of exchange which is the change in real terms. As long as the changes are proportional and there are no third actors in the economy model, the 2 agents are not affected at all. What matters to them is their transnational rate and not inflation on the whole in this case.
Hope that helps.
